According to the German daily, Bild, party colleagues have already chosen Gabriel to run against Merkel in the election, which is expected to be held in October.
The newspaper reported that former Chancellor Gerhard Schroeder had been pivotal in supporting Gabriel's nomination to contest the election.
BILD reporting SPD leader & German Vice-Chancellor Sigmar Gabriel is to run against Angela Merkel for chancellor in this year's election https://t.co/tgkJ6zE7OW— Andrew Connell (@AndrewIConnell) January 9, 2017
The SPD (Social Democratic Party) rejected the media reports, taking to Twitter to dismiss the claims as "speculation" and saying the decision over the party's leadership would be made on January 29.
Gabriel's SPD nomination would set up the rare situation where the current chancellor and vice-chancellor will directly face each other in the next election campaign, with the SPD acting as the junior partner in Merkel's CSU-led (Christian Social Union) grand coalition since 2013.
Election battle lines have already been drawn as the SPD aims to differentiate it from its conservative coalition partners, with Gabriel recently criticizing Merkel-led austerity in the Eurozone, saying it had weakened the bloc to a point where the break-up of the EU was no longer "unthinkable."
While many analysts believe another CSU/SPD grand coalition will be the most likely outcome of this year's election, some social democrat officials are preparing themselves for the prospect of potentially forming a left-wing coalition government with the Green and Left parties, as seen in the Berlin state elections late last year.
Speculation Over Schulz
Gabriel's expected nomination to contest the election for the SPD also comes amid speculation that outgoing European Parliament President Martin Schulz may also challenge to lead the party at the polls.
Schulz announced that he would not seek another term as EU Parliament president, with his term expiring later this month.
Some SPD figures were understood to have supported any plans by Schulz to challenge Gabriel, arguing that it may be difficult for the vice-chancellor to effectively distance himself from Merkel.
This comes amid a backlash against the German government's refugee policy and a rise in support for populist groups.
In 2015, Gabriel won only 74 percent of support from his party in a confidence vote, the lowest from an SPD leader in 20 years, leading to speculation there was some dissent within the ranks over his leadership.
A recent poll released by German broadcasters ARD showed the SPD winning 20 percent of the vote, while Merkel's conservative bloc had the support of 37 percent of the electorate.